Barclays profit driven by investment banking

U.S. authorities are investigating Barclays PLC for potentially violating anti-corruption laws during its scramble to raise money from Middle Eastern investors in the early days of the financial crisis.

The probe, being conducted by the Justice Department and the Securities and Exchange Commission, is at an early stage. Barclays said Wednesday that it is investigating the matter itself and cooperating with the authorities. The U.S. investigation follows a similar probe that British regulators opened earlier this year.

According to people familiar with the probe, it is examining Barclays' use of middlemen serving as brokers to connect the bank with powerful Middle Eastern interests at a time when the bank was seeking a cash injection from investors in the region.

Barclays disclosed the investigation Wednesday at the same time it reported a GBP106 million third-quarter loss, weighed down by an accounting charge, repayments to aggrieved retail customers and sluggish investment-banking revenue. The British bank also warned that the U.S. Federal Energy Regulatory Commission is preparing to take action against it for alleged manipulation of electricity prices in the western U.S. between 2006 and 2008 -- charges that Barclays denies.

The new investigations represent the latest blows to a once-proud British institution. This summer, Barclays paid about $450 million to settle U.S. and British charges that it sought to manipulate benchmark interest rates, sometimes at the behest of top executives. The ensuing political furor led to the abrupt resignations of Barclays's chairman, chief executive and chief operating officer.

On Wednesday, new CEO Antony Jenkins acknowledged that the bank has "much to do" to restore trust among shareholders and the broader public, but played down the severity of the new U.S. investigations.

"You should not assume that either of them will imply any wrongdoing on behalf of the Barclays group," he told analysts.

The Justice Department and SEC investigation involves possible violations of the Foreign Corrupt Practices Act, which among other things bars companies with U.S. operations from bribing overseas politicians or corporate executives in order to win business.

In June 2008, as the financial crisis was gaining steam, senior bankers at Barclays persuaded the Qatar Investment Authority and other investors to inject about GBP4.5 billion into the British bank, seeking to erase fears about Barclays's health. As part of that deal, Barclays hired the Qatar fund to provide "advisory services' in the Middle East. The bank later disclosed that it was paying about GBP238 million in fees and commissions to Qatar Investment Authority and related entities.

This summer, the U.K.'s Financial Services Authority launched a formal investigation into Barclays's public disclosures of those arrangements. The probe focused on past and present Barclays executives, including finance chief Chris Lucas, as well as on the manner in which Barclays wooed the Qataris to invest, according to people familiar with the matter.

The British investigation intensified in late August, when the Serious Fraud Office sent a letter requesting that Barclays hand over reams of evidence related to its 2008 Middle Eastern fundraising, these people said.

The U.S. investigation got underway more recently. Early this month, the Justice Department and SEC contacted Barclays and requested phone records, emails and other evidence, according to people briefed on the case.

The investigators are focused in particular on Barclays's use of external brokers who facilitated meetings between bank officials and powerful Middle Eastern families, businessmen and others, these people said. Barclays and other banks regularly rely on such "introducers' -- often well-connected local businessmen or consultants -- to lay the groundwork for deals.

Barclays recently started conducting a far-reaching internal investigation, with the help of an outside law firm, to figure out whether it or its Middle Eastern "introducers" might have run afoul of the strict U.S. anti-corruption laws, according to a person close to Barclays.

In Wednesday's disclosure about the investigations, included on the penultimate page of its 37-page financial results package, Barclays didn't say whether it believes it was in compliance with the Foreign Corrupt Practices Act. Instead it simply stated that it is investigating the matter and cooperating with authorities. The person close to Barclays said the bank hasn't been presented with evidence that it did violate anti-corruption laws, but wasn't sufficiently confident in its position to publicly declare its innocence.

More than 90% of Foreign Corrupt Practices Act cases include allegations that companies or individuals made improper payments through third-party intermediaries such as agents or consultants. The SEC and Justice Department typically focus on whether fees paid to these parties are proportional to the work they performed for their clients. If they aren't, it could signal that a portion of the fees were passed along as bribes.

In recent years, the U.S. agencies have pushed companies to closely vet such third parties. A failure to do so can cast suspicion on a company's anti-bribery controls in the eyes of law-enforcement authorities.

The expanding investigation has fueled speculation among some executives that Mr. Lucas, due to his role in the investigation, might step down in coming months. A senior Barclays official said Mr. Lucas has no current plans.

The electricity-manipulation case stems from allegations by FERC last April that Barclays traders violated market-manipulation rules in the trading of certain electricity contracts in the western U.S. between November 2006 and December 2008. FERC's enforcement staff notified Barclays last week that it planned to issue a public order laying out the charges and proposing penalties as soon as Wednesday. Barclays said it "intends to vigorously defend this matter."

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